Difference Between Home Loan for Salaried and Self-Employed

The dream of owning your own home- whether a cosy flat near your office, a villa by the outskirts, or an apartment in a bustling city- is closer to being achieved these days. Home loans have made it possible for people to realise this dream. 

Once you’ve done the math, browsed real estate sites, and now it’s time to approach the bank. Now, home loans aren’t a standard size that fits all, because the process is different for a salaried employee and a self-employed individual. 

This blog will break it down so you can be well-informed. 

Why the Difference Exists in the First Place

Certainty is always a make-or-break deal for banks. If you’re a salaried individual, your income is usually steady, and your credit score is great, but if you’re self-employed, your income might be higher, but it can also be irregular.

This is the reason lenders look at home loans for self-employed applicants differently from salaried ones. It’s not about picking a favourite, but more about assessing risks. 

Here are some significant differences between home loans for salaried and self-employed.  

1. Documentation 

The first big difference  is  that if you’re salaried, your bank will probably ask for the following documents:

• Salary slips from the last 3–6 months
• Form 16 from the last 2 years)
• Bank statements (usually last 6 months)
• If you’re self-employed, there’s more paperwork involved:
• Income Tax Returns (last 2–3 years)
• Balance sheets and profit & loss statements should be certified by a CA
• Bank statements for the last 12 months
• Proof of business ownership in documents such as GST registration, trade license, etc.

Why?

A salaried person’s income proof is straightforward. For a self-employed person, banks need a bigger picture- your business health, income consistency, and repayment capacity.

2. Income Evaluation

For salaried employees, the monthly income is taken at face value. If you earn Rupees 60,000 a month, you mention it in words, and the bank uses that figure to calculate how much loan you can afford.

For a home loan for self-employed applicants, it’s a tad challenging. Banks take into account your average income over a few years, deduct expenses, and apply a conservative estimate. This means even if you had a great business year, the bank might assume your success over your other, less-profitable months to calculate your income figure.

3. Loan Amount & Eligibility

A salaried employee who earns rupees 80,000 a month is likely to get a higher eligible loan amount faster because their income is considered consistent and safe.

A self-employed person making Rupees 1,00,000 a month on average could be rated low for eligibility if their earnings vary month to month.

This is because banks prefer to lend amounts if they are convinced that you can pay every single month, no matter how your business is doing.

4. Interest Rates

Interest rates for both salaried and self-employed individuals are generally more or less same. The catch here is that self-employed borrowers tend to find fewer special rate offers compared to salaried ones during promotional campaigns.

5. Processing Time

For salaried borrowers, loan approval can be quick because verification is straightforward and done on face value. 

For self-employed borrowers, it takes longer because the bank cross-checks all financial documents, verifies business credibility, and sometimes even visits your place of work.

6. Credit Score

The credit score is one of the biggest deciding factors for both. But for a home loan for self employed borrower, a high credit score is more impactful as it can help convince the bank of the consistency in payment.

Salaried individuals benefit a little, as even a slightly average score allows them decent offers if their job and income are stable. 

7. Tenure Options

Both salaried and self-employed applicants usually get similar tenure options, which are up to 20–30 years, depending on age and loan type. But if you’re self-employed, your income proof has to be convincing enough for the bank to consider you as a stable repayer in terms of income. If your documentation does not convince them, they can shorten the tenure to reduce their risk.

Tips to Improve Chances Of Home Loan For Self-Employed

• Maintain organised and clear financial records, as it makes it easier for the banks to verify.
• Keep your IT returns filed consistently no matter what your income inflow is for a particular year; filing returns builds credibility and trust for you in the lender’s eyes.
• Avoid cash income, as digital transactions are easier to track.
• A good credit score will always increase your chances of home loan approval, up a few notches. Pay your EMIs and credit card bills on time.
• Keep your personal and business accounts separate – It avoids your transactions getting mixed up.

Home loans for self-employed and salaried individuals are like two different routes to the same destination- just that one is a straight road, the other has a few bends and stops, but both lead to the same place and work for the same purpose: getting your own home.
What matters ultimately, whether you’re salaried or self-employed, is that banks can assess you as someone who can comfortably and consistently repay the loan. A majority of the decision of the lender to allow or reject your home loan application depends on your credibility, honesty and integrity. The approvals may be smoother and more lenient for salaried applicants, but with the right approach and preparation, a home loan for the self-employed can be equally attainable.